Beware of ‘Cadillac Tax’ Complexities

With new studies showing that more than one-third of all health plans will likely be subject to the impending “Cadillac” excise tax when it takes effect in 2018, more employers are getting concerned that their employees will be hit by this measure.

The Internal Revenue Service will tax plans that exceed certain cost thresholds, beginning in 2018. The 2018 thresholds are $10,200 for self-only (single) coverage and $27,500 for other than self-only coverage, and after that they generally increase annually with inflation.

Any portion above the threshold will be taxed at 40%, which the employee will be responsible for.

But figuring out whether a plan breaches the threshold is not just as simple as looking at each employee’s total insurance premium. You have to take into account the combination of health benefits received by that employee, and that can be different among your workers – and even among those enrolled in the same health insurance plan.

The IRS has yet to release final regulations regarding the application of the tax, but under the law, the cost for each employee generally will include:

The cost if the health insurance plan;

Employer and employee contributions to a health savings account (HSA) or a health reimbursement arrangement;

The value of coverage in certain on-site medical clinics an employer may have; and

The cost for certain limited-benefit plans if they are provided on a tax-preferred basis.

FSAs allow employees to sock away an untaxed percentage of their paycheck for health-related expenditures during the year. Employees often are permitted to elect any amount of contribution up to a cap (which is $2,550 this year), which means that the amount of benefits for an employee subject to the Health Care Provider Taxonomy Code in a year could vary depending on their FSA election. Some employers will also contribute to their employees’ FSAs.

An example with HSAs

Employee 1

Has a health plan with a premium of $8,100 a year. Does not enroll in the employer’s FSA plan, forgoing an annual contribution of $730 that the employer offers all FSA participants.

This plan falls under the $10,200 threshold for the excise tax, and hence no taxes would be paid for this plan.

Tax owed: None

Employee2

Has a health premium of $8,100 a year. Enrolls in the employer’s FSA and pays the maximum amount (estimated at $2,600 for 2018) and also receives the employer’s $730 contribution to the plan. Those combined add up to $11,430, which is $1,230 above the Cadillac tax threshold.

Tax owed: $492.

Who pays?

Interestingly, under the law, it is not the employee who is responsible for paying this excise tax, but the insurance company that provides the health plan – and the employer in the case of an HSA. If there is a third-party administrator that handles claims, they too are subject to the tax in the case of other health benefits.

It’s expected that the insurance company and other service providers will pass the costs of the tax on to employers. But if there is more than one service provider in the equation, the tax must be allocated across all of them.

Can you see the administrative headaches looming?

And if there are numerous entities involved, it may also take longer to figure out what the total tax will be, especially if it’s split among them. This means that service providers may need to bill the employer retroactively for the cost of the tax they pay.

If you are concerned about any of your plans breaching the Cadillac tax ceiling, feel free to contact us and we can start planning for your future coverage.